It’s not surprising to see airports put out incentive packages to bring in new flights, but there was something about the deal Delta did to bring Transatlantic flights to Indianapolis that grabbed my interest. The Indianapolis Business Journal wrote about the hefty subsidy and gave good insight into how Delta views this opportunity.
As you may or may not know, Delta 500 (a little bit of vanity flight numbering to celebrate the Indy 500 car race) first takes to the skies on May 24 at 6:12pm. It puts down at Paris/Charles de Gaulle the next morning at 8:35am. The return flight comes back in the afternoon, so the 767-300ER only spends an hour and 45 minutes on the ground in Indy. It runs daily during the summer, but then the rest of the year it’s sub-daily with anywhere from three to five flights a week as of now. But I imagine that schedule is highly dependent upon how bookings ramp up.
This route was something of a surprise, but there is precedent. Delta took money to start a Pittsburgh to Paris route a few years back with a 757. The money is gone, but Delta still operates the route during the summer, now on a 767.
Indianapolis is a little different. It’s too far to start off with a 757, so it requires the 767 right off the bat. It is, however, a place with more Delta loyalty than Pittsburgh. After all, Indianapolis was “red tail” country, a big part of Northwest’s old “Heartland” strategy. With Southwest continuing to grow there, Delta probably has long looked at ways to solidify its standing. A flight to Europe is one way to help, especially with companies that travel internationally. Give them a European route (which despite what the article says, is a Delta hub thanks to the Air France joint venture), and you can put together a nice contract to get their domestic business as well.
But Delta wasn’t going to just go into this without an incentive. After all, it requires a pretty expensive asset flying a long distance. Further, Transatlantic service is something that Indianapolis has drooled over for years. If Delta couldn’t get a good incentive to make this work, the airline would have been completely inept. And we all know that’s not the case.
Normally, incentives are meant to guarantee certain minimums. It helps an airline to know that if it can’t attract enough passengers at a decent fare, it has the revenue guarantee kick in to keep the flight from bleeding red. But this one was set up differently.
As the paper notes, there’s a deal that runs for two years. For the first year, Delta gets $55 per passenger each way up to $3.5 million in total subsidy. For the second year, it’s $35 per passenger each way up to $2 million. The paper did the math, and Delta needs to fill somewhere between 50 and 60 percent of seats to get that full amount. (This can vary if Delta changes capacity, of course.)
This suggests one of two things. Either Delta is concerned that it won’t be able to fill its airplanes up much past 60 percent, so it needs a revenue boost on the seats it can sell (maybe more of a winter concern). Or Delta isn’t worried about filling airplanes up at all. It’s just concerned about generating the kind of fares it needs to be profitable (possibly more of a summer concern).
This isn’t an insignificant amount of money, especially in the winter when fares are much lower. Let’s say Delta sells a $750 roundtrip fare. That’s not unreasonable to see in the off-peak season, especially when you consider that connections via Paris have to be prorated anyway (even after Air France inevitably cancels the ongoing flight thanks to a strike). More than $100 of that is coming out in taxes and fees, so Delta is only going to see maybe $600 to $650 at best. This guarantee is going to pay out $110 to Delta for that roundtrip traveler, so you’re talking a huge boost to the average fare.
If this goes as planned, the route will develop quickly, and by the time the subsidy goes away, Delta will find the flight on solid footing. If it goes extremely well, it could sustain as a year-round flight. Were I a betting man, I’d say we’ll see this end up like Pittsburgh as a summer-only option, but it’s an untested market so we don’t know for sure.
Delta spokesperson Morgan Durrant was quoted as saying, “You look at what our large competitors are doing, and it’s not quite this.” There may be some nuance, but it’s fairly similar to what British Airways and American are doing. The difference is that BA is using its own airplanes to do flights to smaller cities like Nashville and New Orleans. But thanks to the joint venture, it doesn’t matter which airplane gets used.
This does, however, shine on a light on United’s seeming lack of willingness to play in this space. United’s joint venture with Lufthansa goes back many years, yet you see very few flights connecting non-United hubs in the US to Lufthansa Group hubs in Europe, other than those larger cities with Lufthansa has flown for many years. Sure there have been a couple experiments like San Jose to Frankfurt, but these airlines are well behind the type of integration you see with the other big guys starting to drill down into medium size cities. Delta, however, seems like what it sees in this space, especially if it can get healthy subsidies like that one Indy is giving out.
Curious if the DL flights to CDG from RDU received a similar subsidy. Seems like a good approach for a city to get the service they desire but ultimately the pax are paying indirectly. I’m not an Indy resident but if I were I’d surely pay an extra $100 r/t for a direct over the hop up to DTW.
I think the RDU subsidy was a little over 2 million (fee reduction and marketing) for the first year. As a Raleigh resident I would prefer to take the Delta nonstop, but the premium is usually $200 to $400 (for basic economy!) over a single stop itinerary. This is too much for a leisure trip.
But the passenger won’t pay it, the city or whomever made the guarantee will cut a check based on actual passengers flown. Straight giveaway of tax dollars.
It would be nice if the passenger could pay such a subsidy directly but the airline would probably balk at such an arrangement because that increased pricing would make its flight less competitive.
A – Not quite like this.
” The airport authority is waiving $1.25 million in fees that Delta would otherwise have to pay and is providing $500,000 in funding to promote the Paris flight. A public/private partnership, including local governments and businesses, has committed $1.1 million to support the flight, according to the authority.”
How does a subsidy like this work in a JV? Does it go to Delta or the JV?
Chris – Good question. I would assume it goes into the JV, but I can’t say I know for sure.
It is funny that a city as large as Indianapolis has trouble getting direct international flights. Wikipedia says that the metropolitan area has around 2 million people. I live near Halifax, Nova Scotia which is much, much, much smaller. We’ve had direct flights to Heathrow for decades, and currently have seasonal flights to Gatwick, Glasgow, Paris, Frankfurt, Keflavik.
The Heathrow run was on a 767 until very recently but this was likely helped out by a lucrative cargo business. Now all of the flights are operated by 737’s except Frankfurt.
I guess the big difference is that YHZ is nowhere near any major airports and connecting involves flying in the wrong direction for a couple of hours. Indianapolis is too close to Chicago and Detroit, so it is easy to connect. I’ve heard that Americans are far less likely to own a passport than most other first world citizens, so that will cut down on international travel. Also, it is a pretty short flight to western Europe from Halifax.
For YHZ, I’d say the ability to use a short range narrow body makes all the difference. Add to that the overall higher rate of international travel for Canadians and you’ve got your answer.
Might also be that people are less interested in visiting the joys of Indianapolis than Nova Scotia…
LHR-YHZ was frequently a useful way to find lower cost, indirect flights to YYZ (which is usually an absolute rip-off, year round).
Europeans don’t want to go to Indianapolis, whereas Halifax is much more appealing to the leisure traveler.
I think there are a few factors at play: 1) Indianapolis is a fairly large city but given close proximity to hubs in Chicago, Cincinnati, and Detroit, the capture area outside the metro area is small. Most people from northern Indiana, for example, would rather take advantage of the additional options from Chicago. 2) I don’t know that there’s much reverse demand on this route. Indianapolis is busy May for the Indy 500 but the city doesn’t have much appeal for international travelers for the rest of the year. 3) I will overly generalize but, as a native-born Hoosier, I’ll take the liberty in saying that many residents of Indiana prefer to travel to warm-weather spots like Cancun, Florida, etc. I went to college just outside Indianapolis and was amazed by the number of people who’d never visited Chicago (I’m serious), NYC, or Boston but religiously took annual trips to Ft Myers or Orlando. 4) For people wanting to go to Europe, Chicago is a quick flight and non-stops to JFK, Dulles, Charlotte, and Philadelphia provided a great number of single-connection destinations across Europe. Rather than flying from IND-CDG and then connecting to FRA or FCO, I’d much rather make the connection before leaving the US and knowing that I could wake up in my preferred destination.
AC also flies YYT-LHR and when I was there in 2007, it was on an A320 series plane.
I think there are several factors at play. First, the coast of Canada has a lot more opportunities for Europeans who love the outdoors. The area around Indianapolis is flat cornfields. IMO Indianapolis isn’t really a top choice for tourism. There is business in Indianapolis such as Eli Lilly, which would require business travel, but that’s about it. CVG – CDG is a flight still because of GE and Safran have their partnership.
Second, YYT and YHZ would require backtracking to any other hub to go to Europe and those flights can be done with narrow bodies. YYT – LHR is shorter than SFO – Hawaii and there are actual diversion points between Atlantic Canada and Europe. IND – Europe requires at least a 767 sized plane.
Third, the amount of Americans holding a passport has actually increased a lot. About 42% of us hold one. In the early 1990’s, it was less than 5%. A lot of that is due to the fact you can no longer fly to any other country without a passport these days. We used to be able to cross the border with Mexico and Canada with just a driver’s license. I’ve crossed the border a couple times and was never asked for ID. How times have changed.
I think you vastly underestimate the business climate in Indianapolis. In addition to Eli Lilly, Cummins has it’s global distribution headquarters there (most of their business is done outside of the U.S.), Rolls-Royce has a large presence, Infosys is building their largest tech hub in the U.S., not to mention it houses Salesforce’s second largest location, and a large Allison Transmission factory. Early on, there was talk of Rolls-Royce using DL500 to transport parts from their Indianapolis factory to end users in France and England.
I’m a STL resident, and I’ve been hoping for a while that we get an AA or BA flight to LHR. We have WOW Air flights over to Reykjavik starting this month, which is the first transatlantic service in a long time. I wonder if we could possibly score a flight over to CDG (most likely on Delta equipment, as AF doesn’t seem too interested.)
Hey neighbor. I am a Columbia MO resident and fly to LHR and beyond several times a year. I have thought the same thing about an AA or BA flight from STL but it is so easy to connect in ORD or DFW I wonder if people would pay much more to go nonstop. For me out of COU, I still would prefer to connect instead of driving 2 hours to STL. They would probably put a crappy plane out of STL also. But I do think STL needs to pay an incentive to get a regular airline to fly to Europe. They paid Wow but I cant imagine many business travelers using Wow, just leisure.
STL gets WOW, not even Icelandair. I hope it goes well so that sooner or later we here in STL can get either LHR, CDG or DUB. I think STL may be the largest market now without a nonstop to the UK or mainland Europe in the US. If not, we’re in the top 3.
This seems like a page from the old NW playbook. I remember when they launched flights to AMS from BDL and some other smaller airports.
5.5m over 2 years seems extraordinarily high for a single flight. Any comparisons to Pittsburgh or other similar service?
Bill – Pittsburgh was valued even higher: http://www.post-gazette.com/life/travel/2008/11/07/Paris-flights-backed-by-9M-subsidies/stories/200811070197
Just curious if you’re aware of whether or not BA is receiving and incentive or a subsidy for its soon-to-commence nonstop from BNA to LHR?
Curious of that as well as the Speedbird flights to other second tier US cities like AUS, MSY, etc. Hard to believe some of those were initiated without subsidies.
Dan – Definitely. Looks like $1.5 million from the state and $500k from Nashville.
Thanks for that link. As you know, AA had a BNA-LHR nonstop in the mid 1990s. Mike Dye, the station chief there at the time, told me they scuttled it after about 18 months because the front cabins were filled with Y-fares on upgrades while Y flew nearly empty. Upgrades are not nearly as easily available as they used to be, and there is more money in the BNA market, as BA’s research has discovered. Will be curious to see if this flight works this time around.
The comparison to United/Lufthansa at the end is an interesting point. Portland is a good example. Lufthansa had a daily PDX-FRA, Delta came in with PDX-AMS and Lufthansa exited quickly. Delta has now even added summer PDX-LHR (non-hub to non-hub!). And those flights have survived the end of Delta’s partnership with Alaska.
Since DL owns a piece of VS, PDX-LHR in away is to a HUB, so there is VS beyond markets to tie into.
This is slightly true, but VS has zero European destinations. The only realistic connecting opportunities are Lagos, Johannesburg, and Dubai.
Interesting they chose AMS in this case instead of CDG. Just spreading things around or was there another reason?
My only guess would be this makes northern European connecting routes shorter than if they had to go down to Paris and then back up.
Bill, culturally AMS seems like a better fit for PDX than CDG..
PDX-AMS was started by Northwest before the merger (KLM was NW’s joint venture partner). It was very successful so the merged Delta has kept it.
This is all about Nike. US headquarters near Portland, European headquarters near Amsterdam.
The way things have been with French strikes, I wouldn’t want to connect in Paris if I didn’t have to. Maybe IND-AMS would have been a better choice since I would think most traffic would be to beyond points.
Good article CF, thank you.
It looks like we’ll see a lot more of this too. With the superior range of the A321LR many more city pairs will open up, and to capitalize on this airlines such as Aer Lingus are actively working on this now. See: https://www.linkedin.com/pulse/aer-lingus-launches-search-new-north-american-airport-mark-pilling/
No doubt others will follow, or are already working their plans.
structuring the deal this way forces delta to try to make the route work since it isn’t a revenue backstop. How will the $35/55 per pax work if the passenger doesn’t originate in IND? RM systems will inevitably flow passengers through IND from hubs
When you reference RDU giving $500k to promote the flight in the comments, those funds aren’t exclusively used for marketing and are generally used to offset other fees the airline will incur. Completely new stations for an airline will use the marketing allocation to build the ticket counter area, etc
Mark – Looks to me like it doesn’t matter if it’s a connection or not.
It’s just how many people get on the airplane.
As for RDU, I was just copying and pasting what I read. I don’t know the details, but thanks for clarifying.
Similar to Delta’s RDU – CDG flight (a 757) or American’s RDU – LHR flight (767). Wonder if those are subsidized.
AA’s RDU-LHR nonstop has been upgauged to a 777, and various blogs have speculated its among the most profitable in the system. I don’t think it’s subsidized. See http://www.newsobserver.com/news/local/counties/wake-county/article136991563.html
and Delta’s RDU-CDG is now a 767-300ER. The fact that both routes have been upgraded shows the strength of the RDU market.
Indianapolis has a decent amount of international business. The revenue guarantee and Delta’s willingness to try the service to Paris is because Indianapolis travelers have been forced to fly to other cities in order to access the world. It is well documented that air service helps to increase the attractiveness of a city to business.
Indy is home to or has major operations with Eli Lilly, Allison Transmission, Rolls-Royce, Roche Diagnostics, Cummins Diesel engines, all of which have major international operations, and, more nationally, Anthem Insurance.
It is also because Delta has the largest fleet of 767-300ERs, the smallest intercontinental widebody, that it can take on flights like this without having to fill too many seats.
As a potential future focus city for Delta (current focus cities are BOS, CVG and RDU), IND-CDG has the potential to increase Delta’s presence in a market that is currently fairly well divided among multiple carriers but where Delta still carries the majority of local IND revenue.
yes, but – I still don’t get this. Only make sense for those who actually want Paris or some third/fourth tier cities in Europe served by AF, and are actually willing to endure AF and CDG, Otherwise as already mentioned, you can 1-stop with a vastly more desirable US and (pre-overnight sleeping) connection, almost anywhere, thru ORD/DTW/JFK or IAD. If I’m in Indy and need to go to say Prague or Zurich or even London, aren’t there vastly more attractive options (assuming price is similar)? One of Eli Lilly’s 2 major operations in Europe is near SXB – and even if you took this new flight, you’re still 2 stops – AF doesn’t serve nonstop from CDG. So I don’t get it.
The AF CDG-SXB route ceased operation in 2013; the TGV high-speed rail line (which had opened in 2007) was very popular. It’s only a bit under two hours to get to Strasbourg on the TGV from Paris anyway.
There are multiple airports in/around the Strasbourg area that could be used for connecting to international air service. Eli Lilly and other companies are fully aware that not all of their facilities are accessible to the closest airport. Mercedes Benz’ manufacturing facilities in Alabama are not “next door” to any international airport or even the closest airport that connects to international flights. Companies often provide shuttles from the closest airport that has international service.
Further, Air France from Paris serves scores of cities that do not have direct air service from the US on any carrier.
The business community of Indiana and specifically Indianapolis is willing to put money on the table including support Delta’s new service or it wouldn’t be launching. That is precisely why virtually all business-related revenue guarantees originate including the addition of Paris from Raleigh-Durham, on top of American’s existing London service. Economic development authorities and businesses have made the determination of whether additional or new service is valuable enough to support it both from a startup standpoint and from using the service. The chances are there that Delta will make money on the route and they won’t have to spend any of their own money to support a route – confirming that IND lacked air service that it could have had and that there is the potential to support other markets.
And while not specifically mentioned in this article, Delta is adding service to other US cities from IND, part of a larger strategy for DL to give the largest IND corporate accounts a level of service with one carrier to shift revenue to DL. The strategy is being used by DL in other markets and IND appears to be as good of a candidate for a buildup including a transatlantic flight as other cities. IND might be providing revenue guarantees for a CDG flight but they are getting a larger DL presence to other cities.
MB in Alabama is 2 hours from ATL
And with MB us headquarters in ATL thats likely the connection point just because they are going to be filling that flight every day of the week
How is Montgomery not close to a major airport? Atlanta has service to Montgomery.
I’m always leery of subsidies such as this, mostly because it seems like a dubious use of tax payer money to subsidize travel for individuals who likely have the money to pony it up anyways. Unlike EAS, these sorts of subsidies are not necessary to truly maintain connections to the air travel system, and exist primarily for prestige and so that business travelers don’t have to make a connection.
Sean S – In cases like this, the cities have to believe that they can support a flight, and the airlines just don’t realize it. So they put money in to help convince the airlines to try it. In some cases it works; in some it doesn’t. But I don’t think this is a terrible one to try.
Very interesting, especially considering that DL already operates a nonstop CVG-CDG, only about 1 hour and 45 minutes drive from Indy. It’s well known among DL nonrevs that the CVG flight is seldom anywhere near full. It is thought that a major factor of this route’s success is based upon ferrying engine components for GE/CFM.
Given the similarity in metro size and corporate presence between Cincinnati and Indianapolis, it’s hard for me to see this flight lasting much longer than the subsidies unless DL is able to work a similarly lucrative cargo deal.
Delta operates transatlantic flights on its own metal at least part of the year from PIT, CVG, IND, and DTW. That is a lot of air service from a fairly small geographic area and a far more dense coverage of a region with intercontinental air service than any other US airline.
As hard as it might be to believe, the US has a lot of solid international business links and also a lot of people that want to travel to Europe and beyond – and vice versa.
As for load factors, they are public knowledge from the DOT. Of AAL, DAL and UAL’s flights for all of 2017 to LHR, AMS, CDG, and FRA, the primary hubs for all 3 in Europe, 19 of the 20 highest load factor flights are Delta flights to/from AMS or CDG. UA’s AMS-EWR is the only non-DL flight in the top 10 highest LF flights to/from AMS, CDG, FRA, or LHR. CVG-CDG is about 2/3 of the way down the list – meaning there are more than a dozen other routes that are below DL’s CVG-CDG in load factor.
If DL non-revs go to CVG, it is probably because other flights are so full but there are other routes on other carriers that have lower load factors.
AMS and CDG are powerful hubs and DL has managed to expand their reach by using smaller aircraft into more markets than AA or UA. IND just wanted to get a piece of the same action that other cities in the business and air travel rich Midwest currently enjoy.
I know you know this, Tim Dunn, but it’s worth pointing out to others here that LF (sometimes written LDF) is not the only relevant statistic in a discussion like this. If a flight flies 100% full everyday with everyone on cheap fares it will likely still lose money. To succeed, a flight needs high LDF and a reasonably high average fare. So while DL may do a good job filling their planes, whether or not those full planes are doing well is a separate question.
The DOT also publishes profitability statistics by region for US airlines. Delta generates far higher margins on its transatlantic network than its peers.
There are people that argue that airlines can shift costs and revenues between regions – but the reality is that the regional revenue and profitability does have to add up to the bottom line system level data that they report to their stockholders and the SEC. Further, the DOT reports are compiled from data the airlines provide to the DOT.
It isn’t a surprise that Delta has a more profitable transatlantic network than its peers since it is more profitable overall and it has the most capacity of the US3 over the Atlantic (which includes Africa).
and the point still remains that business and community leaders in IND are willing to provide revenue guarantees to a flight which they believe the community can support (as CF notes) and the flight connects IND to one of the largest hubs in Europe in addition to Paris being one of the top global travel markets.
Thanks for posting that link–it’s pretty startling how much transatlantic net income has declined from 2015 highs for all three major carriers!
Re: United/Lufthansa, I think their hubs vis-à-vis competitors explains a lot. While any nonstop will pretty much dominate O&D traffic, UA/LH would is in a weaker position to try to serve secondary European destinations through Munich or Frankfurt. Indy’s a good example… to now, the best one-stop options for somewhere like Lisbon or Manchester were through Newark or Philly, maybe Dulles or JFK. Now, Delta will be able to sell competitive one-stops through Paris. But routing the flights through Germany would be longer than any of the stateside connections
What kind of revenue guarantee did the AA Pharma Flight from RDU to LHR have?
IIRC it was strictly with private funds.
Eric A – I have no clue, but that’s ancient history. That RDU London flight has been around since the mid-1990s and if there was some kind of subsidy, it definitely went away ages ago. That route has a specific purpose – it’s the Glaxo express.
Curious to see what it’ll take for MKE to get into the subsidy game…its peers are all getting international service these days and they seem to be working, too, once they get started.
Is there really that much of a market for nonstop trans-Atlantic flights from MKE when ORD is that close? I know traffic can be a pain, but still, MKE to ORD is only 67 miles.
Years back I took a flight from ORD to MKE and the captain announced that it was the shortest (mainline?) flight in the network for American or United.
it’s absolutely apples to oranges to talk about why UA can’t replicate this …on top of AF’s dominant hub operation at CDG and its plethora of connections, there’s probably also insatiable demands for both business and leisure traffic to head to a place like Paris.
now look the star alliance JV hubs in Europe – FRA MUC ZRH VIE BRU. Only FRA has sufficient feed for a such a long-and-thin route, and FRA isn’t remotely close to CDG or even AMS in terms of tourism appeal, so the back of the bus could be even more challenging to fill.
And that’s before we talk about how each of UK/LHR, France/CDG, and Netherlands/AMS are singularly centric while Germany is really spread out, thus limiting the business appeal of such a route.